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Fool on Call: Sonic Spurs Growth

The drive-in operator has a strong plan to drive growth in existing sites.

Sonic(NASDAQ:SONC) closed out fiscal 2006 with nice momentum, as I noted in my last look at the drive-in fast food operator. A look at its recently released fiscal year 2007 first-quarter figures suggests that the Oklahoma-based chain is poised for another solid year of growth.

Quarterly earnings conference calls offer investors a unique opportunity to gain insights on business development that would otherwise be difficult to ascertain. Year-end and first-quarter calls are particularly useful, since they often set the tone for the upcoming fiscal year.

With Sonic's first-quarter conference call, we'll investigate a few of the ways that the company hopes to drive growth for 2007:

Increased credit card usage

Increased My Sonic card usage

Keeping the menu fresh

PAYS leads to increased salesIf there was ever any doubt that credit cards entice consumers to spend more money than they would if they were simply carrying cash, those doubts were removed when fast food chains across the country began employing credit card processors. From McDonald's(NYSE:MCD), to Wendy's(NYSE:WEN), to Steak n Shake(NYSE:SNS), the industry has embraced plastic across the board -- and profited substantially.

Credit card usage has been made available to Sonic customers for some time now -- more than five years. However, it wasn't until the company introduced the PAYS program in February 2006 that credit cards not only became more convenient for customers, but also began to significantly affect the company's top- and bottom-lines.

During the conference call, CEO Cliff Hudson explained PAYS' benefits. Prior to PAYS, Hudson said, "If someone paid with a credit card, you had to carry the credit card inside the store, or the car hop had to." But PAYS has placed a credit card terminal at each drive-in bay. The program made for faster service while helping to boost sales, Hudson said.

Since the program's implementation, credit card transactions have grown from 8% to 10% of sales to more than 25%. Management expects that growth to continue. Moreover, the average transaction amount for credit card users is around $7, according to the company, compared to $5 when customers use cash.

Currently, roughly 90% of Sonic restaurants use PAYS, and it should be fully deployed to the rest over the next several weeks. Additionally, look for Sonic to continue applying the PAYS service to its drive-through windows. To date, roughly 45% of its drive-through windows don't use PAYS, presenting a nice growth opportunity in the coming quarters.

The gift card bonanzaAlong with the proliferation of credit card usage among fast food chains, we've also seen a rapid deployment of gift cards (or prepaid cards). From Starbucks(NASDAQ:SBUX) to Abercrombie & Fitch(NYSE:ANF), gift cards have proven a significant growth driver for many companies.

Sonic is now into its second year of offering its My Sonic gift card. In November and December, the company witnessed a 50% increase in dollar volume year over year. These prepaid cards not only offer a nice boost to sales during the holiday months, but are also a "nice driver to sales in the subsequent month or more," management said.

The company is also excited about customers' ability to reload their My Sonic cards online. This approach gives customers greater convenience while providing a unique way for Sonic to communicate with customers about new menu items and promotions.

Fresh menuBeyond increased credit card and My Sonic transactions, another driver of growth for 2007 will be new menu additions.

Peach Iced Tea was being served in the first quarter, but the company is introducing a Raspberry variety to start the New Year. Sonic's fried cheesecake bites, battered with graham crackers and accompanied by strawberry dipping sauce, along with a new breakfast burrito, are a couple of the new highlights that should entertain customer tastes this quarter.

Management is also aiming to further develop its dayparts, differentiating products for breakfast, afternoons, and evenings. Management sees significant opportunity to grow breakfast and evening dayparts in particular.

Aside from ample unit growth opportunities, Sonic has a sound business strategy to maximize growth within existing units. Through increased credit card and My Sonic card usage, as well as frequent menu additions, it should not only enjoy increased transactions in 2007, but also increased dollar amounts per transaction. This is good news for Sonic --and great news for shareholders.